If the average cost curve for an individual firm is decreasing when it

If the average cost curve for an individual firm is decreasing when it intersects the market demand curve, why is a natural monopoly likely to develop in this market? Explain.

What will be an ideal response?

ANSWER

Perfect competition leads to firms increasing size until reaching the minimum of the AC curve. If firms naturally did so, before reaching this size, a single firm would be left in the market. That firm will no longer need to act as a price-taker as its size gives it cost advantages over potential entrants.